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Product Quality, Linder, and the Direction of Trade

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Juan Carlos Hallak

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Abstract

A substantial amount of theoretical work predicts that quality plays an important role as a determinant of the global patterns of bilateral trade. This paper develops an empirical framework to estimate the empirical relevance of this prediction. In particular, it identifies the effect of quality operating on the demand side through the relationship between per capita income and aggregate demand for quality. The model yields predictions for bilateral flows at the sectoral level, and is estimated using cross-sectional data for bilateral trade among 60 countries in 1995. The empirical results confirm the theoretical prediction: rich countries tend to import relatively more from countries that produce high quality goods. The paper also shows that a severe aggregation bias explains the failure of the literature so far to find consistent empirical support for the "Linder hypothesis", the conjectured corollary to the first theory relating product quality and the direction of trade.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10877.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10877

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F1 - International Economics - - Trade

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. McPherson, Michael A & Redfearn, Michael R & Tieslau, Margie, 2001. "International Trade and Developing Countries: An Empirical Investigation of the Linder Hypothesis," Applied Economics, Taylor and Francis Journals, vol. 33(5), pages 649-57, April. [Downloadable!] (restricted)
  2. Muhammed Dalgin & Devashish Mitra & Vitor Trindade, 2004. "Inequality, Nonhomothetic Preferences, and Trade: A Gravity Approach," NBER Working Papers 10800, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
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  4. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February. [Downloadable!] (restricted)
  5. Peter K. Schott, 2003. "One Size Fits All? Heckscher-Ohlin Specialization in Global Production," American Economic Review, American Economic Association, vol. 93(3), pages 686-708, June. [Downloadable!]
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  6. Eileen Brooks, 2003. "Why Don't Firms Export More? Product Quality and Colombian Plants," Santa Cruz Department of Economics, Working Paper Series 1036, Department of Economics, UC Santa Cruz. [Downloadable!]
  7. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May. [Downloadable!] (restricted)
  8. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier. [Downloadable!] (restricted)
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  9. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June. [Downloadable!] (restricted)
  10. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December. [Downloadable!] (restricted)
  11. Eileen Brooks, 2003. "Why Don't Firms Export More? Product Quality and Colombian Plants," Santa Cruz Center for International Economics, Working Paper Series 1009, Center for International Economics, UC Santa Cruz. [Downloadable!]
  12. Murphy, Kevin M. & Shleifer, Andrei, 1997. "Quality and trade," Journal of Development Economics, Elsevier, vol. 53(1), pages 1-15, June. [Downloadable!] (restricted)
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  13. Juan Carlos Hallak, 2003. "The Effect of Cross-Country Differences in Product Quality on the Direction of International Trade 2002," Working Papers 493, Research Seminar in International Economics, University of Michigan. [Downloadable!]
  14. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June. [Downloadable!] (restricted)
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  15. Francois, Joseph F & Kaplan, Seth, 1996. "Aggregate Demand Shifts, Income Distribution, and the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 244-50, May. [Downloadable!] (restricted)
  16. Diewert, Erwin, 2007. "Index Numbers," UBC Departmental Archives diewert-07-01-03-08-17-23, UBC Department of Economics, revised 31 Jan 2007. [Downloadable!]
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  18. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May. [Downloadable!] (restricted)
  19. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March. [Downloadable!]
  20. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December. [Downloadable!] (restricted)
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  21. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December. [Downloadable!] (restricted)
  22. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc. [Downloadable!]
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  23. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James Harrigan, 2005. "Airplanes and Comparative Advantage," NBER Working Papers 11688, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. David Hummels & Volodymyr Lugovskyy, 2005. "Trade in Ideal Varieties: Theory and Evidence," NBER Working Papers 11828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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